The implementation of monetary policy involves the use of direct regulatory administrative measures and indirect instruments to influence the supply and demand for money. In this sense, the formulation of monetary policy operations—that is, the adoption of specific policy instruments and targets aiming at dealing with liquidity issues—is highly diverse among countries. During the last two decades, the IMF has explicitly advocated the use of market-based instruments to implement monetary policy, that is, to try to steer liquidity by influencing money markets through open market operations and auctions instead of relying on direct controls on credit and interest rates.
The Securities and Exchange Commission and popular press have expressed concern that corporations guide analysts’ forecasts with the purpose of managing earnings surprises and producing desired market reactions. Evidence suggests that firms that guide analysts’ forecasts downward during the period and then beat the latest forecast earn a market premium. Furthermore, alternative paths by which earnings expectations evolve over the reporting period are associated with differential valuation consequences. In an experiment, I explore potential explanations (rooted in judgment effects) for observed market reaction patterns to the earnings expectations path and its components. I conjecture that the presence of uncertainty affects investor reaction to the expectations path in predictable ways. I further examine how investors respond to analyst forecasts and forecast revisions in forming their own earnings expectations. I find that investors are more pessimistic than analysts in their earnings expectations. Further, the divergence between investors’ and analysts’ expectations plays an important role in their reaction. My finding of a premium to beating the latest forecast appears to stem directly from the difference between the investors’ own expectations and the analysts’ consensus forecast. Because investors tend to be more pessimistic than the analysts, they perceive a positive (negative) earnings surprise to be larger (smaller) than reported which explains why investors appear to reward positive earnings surprises more than they penalize negative earnings surprises.
We argue that the introduction and widespread use of credit cards increases trading efficiency but must cause a massive increase in price levels, other things being equal. Government monetary intervention sufficient to stop these price increases must necessarily undo all the efficiency gains that credit cards bring. Things are worse if there is default on credit cards: large price increases are inevitable unless the monetary authority is willing to engineer substantial reductions in trading efficiency.
In modern economies, more and more transactions take place via credit cards. They are perhaps the single most visible and talked about economic innovation in the last 40 years. Yet credit cards have not been extensively studied by general equilibrium theorists or monetary theorists, presumably because it has been thought that the effects of credit cards are negligible, or easily managed by monetary interventions. Insofar as they are mentioned in the modern economics curriculum at all, it is only in the context of calibrating the rationality of consumers, or lamenting the indebtedness of the household sector. The efficiency gains they bring, and their effect on price levels, have been ignored. An older macroeconomic literature in the 1950s and 60s did raise these issues about "near monies", but this was before the advent of credit cards, in an intellectual era of reduced form models in which it would have been impossible to directly analyze credit cards anyway.
